Arrackal Alexander Mathan
Manama: Dec. 5th -- (BNA)The focus of the two – day Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) World Bank Annual Conference in Bahrain was on the standardization of Shari’a, accounting, auditing, governance, ethics and risk management for Islamic finance, said Dr Khaled Al Fakih, AAOIFI Secretary General on the sidelines of the AAOIFI World Bank Annual Conference in Bahrain.

In an exclusive to Bahrain News Agency, he said that there were six sessions altogether at the conference, with three session covered on day one. The AAOIFI’s primary objectives is on standardization of Islamic finance practices. Standardisation is an on-going effort that does not end with issuance of standards themselves, but has to be carried through with its continuous implementation. AAOIFI has now issued a total of 88 standards in the areas of Sharia’a, accounting, auditing, ethics and governance for international Islamic finance industry.” The market is dynamic and the standards have to keep pace and be viable to the ever changing needs of the market, he added. “In addition to developing new standards, we are also revising our existing standards. For accounting standards in particular, we have already issued a revised and updated standard on the conceptual framework of financial reporting for Islamic financial institutions. This updated accounting standard on conceptual framework has given us the foundation to review all our other existing accounting standards. This conference forms part of AAOIFI’s continuous consultative process with the international Islamic finance industry. We are looking for a merging of thoughts and minds to ensure that our standards development and review program will result in improvement of standards. For example, the conference has discussed some possible enhancement to financial reporting disclosures on investment accounts. This will help us with the review of existing accounting standards in investment accounts that we are currently carrying out,” said Dr Fakih.

Where have the key changes in standards being brought about?
For accounting standards in particular, we are currently working on five areas – i.e. review of existing standards on investment accounts, Takaful, Ijarah, and Murabaha, as well as development of a new standard on issuance of Sukuk.

Compare the Islamic finance market and the conventional market in terms of the growth.
It is perhaps quite unfair to do a direct comparison between conventional and Islamic finance markets since conventional finance market has been in existence for long while Islamic finance market was first developed only three decades ago. The sheer volume of conventional finance market is huge relative to that of Islamic finance market and therefore a direct comparison will not be meaningful. But growth of Islamic finance market indicates that it is heading the right way. Looking at the overall impact of the financial crisis, one would argue that Islamic finance market has been quite fortunate. Investments in high-leveraged instruments are not in line with Islamic finance principles and thus by not investing in risky assets like derivatives and high-leveraged equities, Islamic finance has been protected to an extent.
What cushion is applied to Islamic banking to prevent it from any shock that could result from human aberrations?
Islamic finance does not operate in a vacuum. For example, in our case, we have adopted conventional finance principles including on accounting and auditing, risk management, corporate governance, and ethics, and reflect them into our standards. In addition to conventional finance principles, we have of course also incorporated Shari’a principles and rules for Islamic finance into the standards. So in general, Islamic finance combines compatible conventional finance principles with Shari’a principles and rules. This is illustrated, for instance, in the area of investments. Islamic finance generally accepts the means of investment as found in conventional finance, as long as they are Shari’a-compliant. And Shari’a principles and rules actually provide a layer of security to Islamic finance. For example, in investments, Islamic finance is generally not allowed to undertake transactions involving derivatives and securities that are highly leveraged.

Compliance with Basel III requirements:
Within the Islamic finance industry development infrastructure, AAOIFI is tasked on standards for Shari’a, accounting, auditing, ethics, and governance. Standards on capital adequacy requirement, the core of Basel III requirments are under the purview of Islamic Financial Services Board (IFSB), which is another Islamic finance industry development body. IFSB has already issued a number of capital adequacy standards and guidelines. It has also recently issued an exposure draft of a revised capital adequacy standard to take into consideration development in global regulatory landscape including relating to Basel III. In general, I believe capital adequacy levels in Islamic financial institutions will continue to be quite robust and should be able to meet any new requirement that may be introduced.

What is the growth trajectory of the Islamic banking sector over the next (?) five years?
Over the next few years, we believe that Islamic finance can achieve growth of around 20 per cent. We are very optimistic of outlook for Islamic finance despite the financial crisis. Standard & Poor’s, or S&P, has also forecasted the global Islamic finance industry to double its current size and reach $2 trillion by 2015.
In addition to the existing Islamic finance markets around the world, Islamic finance can also take advantage of opportunities in potential new markets including Libya, Tunisia, and Egypt. Potential new markets will definitely expand the spread of Islamic finance and may possibly also create new hubs for Islamic finance.